Understanding The Steel Industry

January 4, 2019 by Duffy Singleton

The cost price squeeze (sometimes termed as the value cost squeeze) is a pretty well-known phenomenon to the majority steel industry strategic planners. It is a indisputable fact that ’s been around for quite some time. It refers to the long-term trend of falling steel industry product costs, as evidenced with the falling end product prices that are seen with time. With this sense - notwithstanding the falling revenue per tonne - it should be remembered that the squeeze does help the industry keeping the purchase price competitiveness of steel against other construction materials like wood, cement etc.

Falling costs. The central assumption behind the squeeze would be that the cost per tonne of an steel product - whether a steel plate or possibly a hot rolled coil, or even a bar or rod product - falls normally (in nominal terms) from year to year. This assumption obviously ignores short-term fluctuations in steel prices (e.g. as a result of price cycle; or due to changing raw material costs from year to year), because it describes a long-term trend. Falling prices after a while for finished steel merchandise is at complete variance with the rising prices evident for many consumer products. These falling prices for steel are however brought on by significant alterations in technology (mostly) that influence steel making production costs. The technological developments include:

adjustments to melt shop steel making production processes. An extremely notable change through the last Two-and-a-half decades has been the switch from open-hearth furnace to basic oxygen furnace and electric-furnace steel making. Open hearth steel making is not only very energy inefficient. It is usually a sluggish steel making process (with long tap-to-tap times) with relatively low labour productivity. The switch from open hearth furnace to basic oxygen process or electric arc furnace steel making allowed significant steel making cost improvements - and also other benefits for example improved steel metallurgy, improved environmental performance etc. This is a good illustration of a historic step-change in steel making technology creating a major impact on production costs.

the switch from ingot casting to continuous casting. Here - aside from significant improvements in productivity - the primary advantage of investment in continuous slab, billet or bloom casting was a yield improvement of ~7.5%, meaning significantly less wastage of steel

rolling mill performance improvements with regards to energy efficiency (e.g. hot charging), reduced breakouts, improved process control etc causing reduced mill conversion costs

less set-up waste through computerization, allowing better scheduling and batch size optimization

lower inventory costs with adoption of contemporary production planning and control techniques, etc.
Their list above is supposed to be indicative instead of exhaustive - but it illustrates that technology-driven improvements have allowed steel making unit production costs to fall after a while for several different reasons. Going forward, the implicit expectation is that costs continuously fall as new technological developments [e.g. involving robotics, or near net shape casting] allow.

Falling prices. The reference to the term price within the phrase cost price squeeze arises as a result of assumption that - as costs fall - therefore the cost benefits are passed on to consumers by means of lower steel prices; and it is this behaviour which over time helps you to conserve the cost competitiveness of steel against other raw materials. The long-term fall in costs is thus evidenced by way of a long-term squeeze on prices.

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